Alberta Girds for “Bitumen Bubble” Budget Day on Thursday

The government of Canada’s resource-rich province of Alberta–mired in a larger-than-expected deficit in the wake of weak commodity prices–unveils a budget Thursday afternoon that might signal how the province plans to deal with a rapidly-changing North American energy market that threatens to sap its key source of tax revenue.

The province of 3.6 million has benefited from its vast array of oil and natural gas reserves, using the proceeds from resource royalties to boost spending on programs, such as health care and education, by an average 7% per year over the last 10 years. The windfall has allowed Alberta to finance one of the friendliest tax regimes in the country. It’s the only province without its own value-added tax, and the sole jurisdiction with a flat tax on personal income.

But this fiscal year, the province has sustained a big hit to resource revenue, as the spread between the price for Alberta heavy crude and West Texas Intermediate widened to a 52-week high in January of nearly $33 a barrel before narrowing somewhat in recent weeks.

As a result, the Alberta budget deficit in fiscal 2013 could reach as high as four billion Canadian dollars ($3.89 billion), or four-and-a-half times more than estimated in the province’s 2012 budget. In reaction, Alberta has moved to freeze salaries and fired some senior bureaucrats.

In a recent fiscal update, Alberta warned the wide differential between Alberta crude and other international blends reduces the value of its exports and corporate profits, thereby shrinking the base of revenue from which the government derives revenue.

Part of the price differential is attributed to increased production of U.S. oil, which shows no sign of ebbing. But also in play is the lack of pipeline infrastructure to carry landlocked Alberta bitumen to key markets.

Despite the fiscal hit, Alberta is expected to remain the fastest-growing Canadian province in 2013. Its unemployment rate stands at 4.5%, well below the national 7% average. Also, Alberta is the only jurisdiction that’s not carrying net debt on its balance sheet, as it has been able to stash away revenue in rainy-day funds.

Still, this week’s budget is being closely watched for how the government manages through a fiscal crisis that Premier Alison Redford has called the “bitumen bubble,” a reference to the type of crude extracted from the province’s oil-sands developments.

“This is going to be a make-it or break-it budget for Alberta,” said Jack Mintz, head of the University of Calgary’s public policy school. A third of Alberta government programs are financing directly through receipts from non-renewable resources, he said.

Representatives for the Alberta finance department didn’t respond to requests for comment, or a request to speak to Alberta Finance Minister Doug Horner. In a published interview this week with The Canadian Press news agency, Ms. Redford said this would mark a watershed budget for the province.

“The conversation about a more long-term, sustainable fiscal plan is starting in Alberta,” said Glen Hodgson, chief economist at Conference Board of Canada.

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